I must admit I’m a bit worried about the economic debate regarding the future of Wales, or rather the lack of it.
The discussion on which currency an independent Wales should adopt has been rather conspicuous by its absence – surely a cause for concern considering that is often cited as one of the main reasons for the failure of Scotland to achieve independence in 2014.
We are seeing the matter of the debt of Wales to the UK raised frequently e.g. by the regularly published GERW figures, Wales seems to be dependent on our membership of the UK to sustain that little standard of living we have. This problem seems set to deteriorate as the funding of the pandemic economy through furlough schemes is raising the stakes on government spending even higher.
Fortunately, there are excellent approaches to economics today that show how such problems can be overcome. However, the battle to explain such concepts to politicians, let alone the public, has a long way to go.
Enter therefore an excellent book “The Deficit Myth” by American economist Stephanie Kelton, published a few months ago, a highly understandable introduction to Modern Monetary Theory which explains that there really is no excuse for countries with monetary sovereignty (i.e. have their own currency and central bank) not to deliver full employment for their citizens.
This is in fact a well established school of thought with many professional and academic supporters, and is very different to the monetarism some of us may remember from the 80s which was a right wing attempt to directly control the money supply and sacrifice jobs to ensure low inflation.
We’re in a very different world now – inflation is not increasing despite low unemployment, and under these circumstances, it is wrong and destructive for us to concern ourselves about this illusionary “Government Debt” which seems to have grown bigger than our GDP.
The “Deficit” between Government spending and taxation is the myth this book addresses, and it will take a while for most of us to understand that the taxes raised are not necessary to fund Government spending. The Government does not need taxes for that reason – they could literally “burn” the taxes raised (there are historical instances of this in fact).
If the Government needs money, at any time, it can “print” money. The seemingly negative number total (if you like) associated with Government spending has no relationship to the apparently equivalent positive total for the taxes raised, it’s just our false instinct to want to put them together and compare them.
This is a big deal of course as it affects everything a Government does. We should start with Covid: there is now no reason for the Government to stop the Furlough scheme too early. The debt built up is within the country, and it’s only a debt to ourselves therefore not a real debt at all. It’s not causing inflation so it should be continued (or adapted, naturally) until we have overcome any unemployment threat we face. There are inevitable political battles over this of course.
So, if we accept there is no problem using Government debt to finance Covid related debts, is Wales’ “deficit” to the UK still a problem?
Yes, but all is not what it seems. The Wales Governance Centre have also published a report which includes analysis relevant to the fiscal situation of an Independent Wales. This paper shows a clear understanding of the radically different context between the position of Wales as a part of another country, and independent Wales with a sovereign Government and the power to borrow, but it is beyond the scope of this report to explain the nature of this difference for the public to understand.
Most people, and most newspapers and broadcasters, will still simply look at the published deficit figure and interpret it as a household would. “What are you going to do about Wales’ enormous debt?” will be the question.
There’s no point telling most people “Independent countries are different, they can go into debt and they don’t have to pay it back”. It won’t be accepted, even though it’s usually true. You can imagine some of them giving us the benefit of the doubt to an extent, but they’d still go on “But it’s much more than the UK’s national deficit, it’s too much”.
How do you answer that? How can you tell them that the deficit is not the real problem?
Now there is a real problem behind this which is the brain drain of people of working age from Wales to England, a problem which can remain hidden in a unified UK, but not in an independent Wales. MMT would not worry directly about the government deficit but would worry a lot about the lost resources from this migration.
We will need to have an answer to that. The most important thing is to have a government which is able and willing to deliver such an answer, and that is a matter of political will.
To be honest, I don’t think I have yet found a satisfying answer in MMT to such questions. We live in a world of criticism; credibility at this level is still an issue for MMT, and this book, great as it is, only starts to address this. I believe that any answer has to be built on the foundations of MMT, and there are now plenty of resources.
My favourite primer at this time is this video explaining how expenditure must come before tax, and also how the British Empire used currency to control Ghana, forcing the “free market” to suit the needs of the Empire. Now, it wasn’t a good deal in terms of trade for the people of Ghana: they had to pay taxes, the guns of the British Empire said so.
There’s a power struggle going on related to MMT which could do with more discussion. Some people will resent paying taxes if they don’t think the Government needs them and may need coercion to ensure taxes are paid. Also, external bodies, including other Governments and financiers, might not trust a Government which did not have financial discipline.
This mythical debt at least looks like financial discipline, and a justification for raising taxes, so that’s really why it’s used. This “debt” can be used as a substitution for real justifications and real decision-making government. This “debt” is a short cut to power without the responsibility and understanding, leading to big questions which I think really matter: can we afford to have people who don’t understand or don’t care in power anymore?
Can we also afford to have a population which doesn’t understand and doesn’t care? I would also focus on another quite real problem for Wales – can we afford to have an under resourced governing body making decisions on these matters?
Meanwhile in Scotland there is a very lively debate about which currency they should adopt, very closely related to MMT, and there is an excellent Blog by MMT campaigner Richard Murphy which regularly addresses the case for Scotland to have its own currency.
They are now adopting a position of continuing with the pound to start with, and transferring to their own currency soon afterwards. But how soon? A few years, a few weeks?
Wales needs this discussion. We need people to understand, and frankly, I think it’s more important for us than for Scotland. They have more or less won their political argument already, and they don’t need to change anything much to succeed as an independent country.
Wales on the other hand needs to plan what to do with independence, we need to learn how to make actual decisions, and the scale of those decisions. We have a weak infrastructure and a significant and unsustainable “brain drain” which we need to resolve.
These are not unique problems for us – many countries in eastern Europe are in a similar situation. The whole point of independence is to be able to resolve these problems, and it is definitely possible according to MMT.
So I strongly recommend people read this book to find a way to understand these key economic concepts. It’s not easy – the suggestion in the book is that even Barack Obama didn’t ‘get it’. He was overly influenced by neoliberal economic thought and would respond to questions about when the Government needed to pay back its deficit by responding that “We are out of money now”.
However, one of his predecessors, John F Kennedy did ‘get it’, and established a space programme without worrying overmuch about the associated deficit.
What we need to do now, of course, is to establish a programme to overcome something much more important than reaching the Moon or Mars, specifically to take on climate change. This is the logical conclusion of the Kelton’s book, that lies behind the proposed “Green New Deal” which all of us all over the world will be hearing a lot more about.